What Is a Denomination?
A denomination is a classification for the stated or face value of financial instruments such as currency notes, coins, as well as bonds and other fixed-income investments. The denomination can also be the base currency in a transaction, or the quoted currency in a financial asset. This last classification of the term helps to clarify the acceptable payment options in trades.
Most often, a denomination is a unit of value given to physical currencies like coins and notes, and other financial instruments that maintain set values, such as government-issued bonds. The denomination value is often referred to as “face value” because it appears on the front, or face, of the financial instrument.
Nomenclature is the act of applying a name to an item, and many currencies carry not only the official title but also a nickname. As an example, the Canadian dollar (CAD) carries the nickname of the loonie because it has the image of a loon on one side. The American $100 bill is known as a Benjamin because it carries the picture of Benjamin Franklin.
In the United States, currency notes dispensed by most automated teller machines (ATMs) are only available in certain denominations. As an example, some ATMs offer $20 bills and $100 bills, while others might provide $10 and $50 notes. In a trade transaction, an exporter based in Europe may invoice the buyer in U.S. dollars, making the transaction U.S. dollar-denominated. While most commodities were quoted in terms of the dollar, beginning in 2011, commodities such as crude oil could receive quotes in other currency denominations, such as the euro.
- Denomination classifies a face value of financial instruments such as money and bonds.
- Often, the denomination will refer to the face value of the instrument
- Bond denominations have a basis on the bond's par value
- Collectible currencies will at times, have a value higher than the face value
Par Values as Denominations
The denomination of a bond or other fixed-income investment is equal to the bond's par value, which is the amount paid upon maturity. One may purchase bonds in a variety of denominations, ranging from $50 to $10,000. When one buys a mutual bond, it is sold for an amount below the marked denomination because the difference between the sales price and the value at maturity serves a function similar to the interest earned in other investment vehicles.
The par value, also known as the nominal value, of the securities can also represent its denomination. However, it may be an inaccurate assessment of the security's importance within the marketplace. The par value represents a minimum value for the holding. When listing stocks, corporations may show the nominal value as zero or one cent. This pricing allows them to avoid legal liabilities they may expose themselves to if they listed the stock at a higher price.
Real World Example
Some individual pieces of currency have a higher retail market value than their associated denomination. These currencies are collectible and sought after by hobbyists and those looking for an alternative investment. For example, some U.S. quarters produced between 1932 and 1964 comprised 90% silver content. Consequently, although the face value maintains their worth at 25 cents, the market value may be higher, based on the price of silver, the melt value of silver, the condition of a specific coin, and the date and mint involved. This difference between the denomination and the melt value ultimately led to a change in the materials used to produce quarters.